Why Democrats lose the war of ideas in Economics

I posted this a little while back in the "General Discussion" but it was too big a post for such a quick moving board so I'm reposting it here


The short answer is that both broad factions of the party, New Democrats and (perhaps less obviously) liberals play into Republican hands. Instead of challenging the foundations of Reaganite ideology and presenting an alternative vision, Democrats of all stripes largely accept it.


New "Business Friendly" Democrats

Kissing up to Wall Street:
If there was ever an industry more in need a healthy dose of regulation, the financial services industry is it. While many of the ethical breaches by industry players are well publicized, such as in the Enron and Worldcom scandals or the Eliot Spitzer cases, the decline in business ethics is only one of the harmful consequences. Another is the rise of "financialism"-- a wasteful and counterproductive enlargement of the finance industry itself. Facilitated by technology and a constant flow of deregulation since the early 70's the broader financial services sector is now larger than the manufacturing sector.

While it might be thought that information technology would lessen the need for manpower in the industry, employment has grown much faster than the population as a whole in the last few decades. Instead technology has chiefly been used to increase the overall volume of trade and to facilitate the maintenance of overly complex and dubious financial instruments, and so we get trading for trading's sake.

Another consequence of the industry's power and hold over our government is excessive profits born of that power. While Banks and financial institutions are certainly entitled to a healthy profit, the level of profit (second only to pharmaceuticals) is ridiculous for an industry that produces little "value-added" contribution. This capital now used to line the pockets of a few would be better employed in support of a host of more economically valuable endeavors (take your pick).

The financial services industry has been able to accumulate such power because as the largest donor to both parties, it never loses an election. This money has tilted democrats away from their traditional alliance with workers. The Business Democrats now have us playing on Republican turf, competing for the same constituency for the same dollars. The Business Democrats consequently reinforce Wall Street's view of the world in the media and this is one reason why the Reaganite/Thatcherite economic view is now dominant.

Market Worship:
Partly a consequence of the financial services industry's rise to power, an economic ideaology that best supports its interests now hold's sway. The "invisible hand" notion that individuals acting in their own best interests produce the best of all possible worlds is basically accepted by both parties. The Business Democrats typically offer minor caveats to the general theme, but they do so from basically the same starting point of market worship. To this, Republicans can always respond with a simpler story and win the battle of ideas.

For example, John Kerry's tactic to prevent offshoring by filling tax loopholes for offshore corporations was couched in terms of making the market more fair. Bush could respond simply by challenging Kerry with waffling on "free trade" and not being faithful to the market worldview. Kerry may win the the specific issue by a wide margin but because it is an "ad-hoc" measure rather than a natural extension of a simple and consistent worldview, Kerry does not connect with voters.


Liberal "Green-Leaning" Democrats

America as bully:
Liberal Democrats like myself have read Howard Zinn, Jonathan Kwity, Noam Chomsky, and Chalmers Johnson. We are disillusioned of the notion that America is uniquely virtuous. America's many sins and abuses of power have been most prominent in the last 55 years or so from the Cold-War period to today's "War on Terror" -- as this is the period when America's power, and its potential for abuse of that power, has been at its greatest. Out of this recognition springs a worldview of "America as bully" in which our military and our government manipulates and takes advantage of less powerful countries to serve American political and economic interests (or the interests of the powerful within America such as the oil industriy). The problem with this worldview is that it tends to be applied too liberally. In the economic domain there is another worldview with more relevance -- "America as sucker".

In particular, the ideology of free trade that is now pervasive among the policy-crafters in America is due in no small part to the influence of foreign trading interests who have been active in our political system for a number of decades. By hiring lobbyists and funding globalization-cheerleading think-tanks (CATO, Heritage, Brookings) and even academic institutions, the interests of foreign nations and foreign-based corporations who wish to export to our country have been advanced.

Unfortunately for us, free trade is a loser's strategy, and other advanced industrialized nations practicing strategic trade in their own national interest have been picking apart American industry for the last 30 years. The most prominent recent example is Boeing's loss of aerospace leadership to heavily subsidized Airbus. If Airbus is able to finish off Boeing, whatever the consortium nations
lose through paying subsidies will be more than made up for by gains Airbus can reap from what will be its monopoly positioning.

The other theme that is overplayed is the notion that by buying Chinese goods, Americans are taking advantage of exploited Chinese workers, and that by the same token domestically-based firms and their investors are also exploiting when they offshore to China. While there is some truth to this "America as bully" perspective, remember that China is utilizing a similar development strategy as Japan, Taiwan, South Korea, Singapore and other East Asian nations once did to achieve wealth. Also remember that these nations are now much more materially egalitarian and middle-class than the United States and even most of Europe. It may be a mistake to apply the classic exploited worker paradigm to China because while they may be exploited, if the pattern holds it is not so much to benefit a
wealthy class of investors, but rather future generations of Chinese.

The general problem with the America as bully worldview is that it is applied too liberally as a overreaction to the hyper-patriots -- the world is a bit more complicated than that particularly in the economic domain. The other problem is that it is an moral argument more than an economic one. The other side can dismiss it easily with irrelevant but rational sounding abstract economic arguments about comparative advantage.


Broad-Brush Anti-Big-Business:
The second mistake that many liberals make is to become anti-"big business". The problem with big businesses is that they become dangerous when they hold to much power and influence. The benefit of big businesses in many domains is that they can achieve greater efficencies through economies of scale. While size doesn't offer a lot of advantages in locally-constrained fields such as food service, in some internationally traded goods, size is essential to compete. A good example is steel where Americans have been losing to Japanese, European, and Korean competition largely because we have failed to consolidate as effectively.

By the same token, liberals make a mistake when they decry "corporate welfare". Decrying Corporate welfare with a broad brush on the grounds that it violates free-market principles feeds into Republican hands because it implicitly validates their market worship while accomplishing little to stop the individual
abusive practices. Corporate welfare in and of itself is not necessarily a bad thing; it makes sense to give subsidies to an infant industry that shows great future promise but could not survive in the short-term without assistance; it also makes sense sometimes to give to an old business that has fallen on tough times, especially if their circumstances are bad because of temporary factors or bad luck -- the disruption of allowing valuable industries to fail can be much greater than the temporary burden to taxpayers.

The problem lies not in the practice of corporate welfare but who gets it. Often in this country corporate welfare is doled out according to political influence, so that big Ag and big finance can count on assistance, while the auto, steel, and civilian aerospace industries get very little support compared to their international competition. What we should want are big businesses that are allowed a certain amount of market power to achieve international competitiveness but are regulated in such a way that they act to meet the interests of the broader economy.

Liberals and "New Democrats" could both learn from this post.

I've bookmarked it in the event that you still want to discuss it in a day or two.

no expiration date on this discussion for me :)

most of it. But I think this country's institutions (business and governmental) have taken such a wrong path in the past 20 years that they may not be amenable to correction, as you seem to suggest.

First, free trade is NOT a losing strategy for the ones who instituted it. It is an efficient pillager's tool for extracting wealth from the population of this country. The European countries saw this right away and protected themselves from the git-go. They were smart because they acted as a society but we were not smart. Since WE THE PEOPLE do not run this country -- businesses do -- we have been treated not to what would make our lives better, but what would make businesses richer. They sell us Chinese-made goods at unheard-of markups; we buy the stuff with our stagnating wages; they get rich and we become poorer. I laugh at the pundits who say it's wonderful that the consumer(they never call us 'citizens')can get such "cheap" electronics, etc. That's nice on its face, but the underlying truth is that an American-made stereo system that cost the consumer more, and on which the seller made a smaller percentage of profit, may well have benefited the general society more because it kept a manufacturing job here at home. When we lost that sensibilty that I try to show in that last sentence, we lost a lot more than a manufacturing job here at home. We lost the whole idea of a society, a country, a people, an economy. We reverted to the love of rapaciousness and pillage.

A lot of us out here who are anti-big-business are really anti-American-big-business-practices. When we decry corporate welfare, it's because we see the CEO is still, somehow, getting his full compensation package for driving the company into the ground, while the workers' pensions are canceled ("we're bankrupt!Too bad, so sad!"). And even while this corporation was viable, it had free rein to: pay its workers nothing compared to what it paid its bigwigs; use creative accounting to cook the books; spy on its workers during the workday; jerk people around with weird shifts, hours, and working conditions; was stingy with its vacation time (where's the leisure society we were promised if we worked hard?); shipped your job overseas; you get the picture. We also see that the incestuous relationship and the revolving door between govt and big business means that abuses are unlikely to be resolved anytime soon because govt people leaving to join big business want their perks. These govt people are unlikely to draft legislation that will hamper them in their future ambitions. If we had a European-styled society where the first question asked about any legislation, regulation, law, etc., was "Will it be good for the average citizen in his everyday life?" then I would have fewer problems with big business. This is hardly the case, however, and I don't see meaningful reform in the near future. There are an unholy number of powermongers who love things just the way they are, and there are millions of wannabes standing right with them. ( I call them, and their worshippers, the "I Got Mine Club" and the "I'm Gonna Get Mine Club," respectively.) Once they got the taste for blood, it's hard to get them to eat veggies.

I'm not so sure that Dems are objecting to the exploitation of workers in other countries -- although, god knows, there's plenty to object to -- as they are objecting to American workers being told that they must compete with workers making a tenth or a hundredth of what they are earning. The whole idea is absurd on its face, and the fact that it is even voiced by economists is mind-numbing. The individual American worker cannot compete, in any meaningful way, with the Chinese or Mexican worker. An American INDUSTRY can possibly compete with a Chinese industry by, say, making widgets with high-speed machines while the Chinese make inferior widgets by hand, but to say that individual workers here make too much money is simply insane. We make enough to scrape by in a very expensive American society, which refuses to even provide us with such amenities as sidewalks, mass transit, health care, reasonable legislations on business, or other necessary community services. But our business leaders continue to tell us we are 'too expensive' when they ship our higher-tier jobs to India or make arrangements for millions of legal and illegal foreign workers to take all the lower-tier jobs. We know what they are doing -- they are wringing out every dime for their own pockets while leaving us to starve. If this is the sort of 'big business' practices we are stuck with, it's no wonder that many Dems wish big business would go away.

Anyway, your post is good and I would have agreed with it back in the 60's and 70's, but I don't think that the pillagers are amenable to reason at this time.

P.S. Agree totally on the "financial services" section of your post. Nearly all of it is useless churning of paper.

I don't think there will be significant change until the problems get so bad that they just can't be ignored. Right now Americans aren't feeling as much pain as they probably should because the rest of the world (Japan and China most prominently) is willing to lend us the money to consume the goods they produce. The extent to which our manufacturing base has dwindled is thus hidden from most of the public.

I agree that it is as bad as you say regarding American institutions. I hold out hope that once a crisis sets in, there will be a shakeup and that somehow effective ideas will emerge. As in the Great Depression period, Democrats will be well positioned to set the agenda if we can conduct a good post-mortem and make convincing arguments that are not along Reaganite lines.

Regarding big business, the only thing I ask is that Democrats be careful making the distinction in their minds between the idea of big business and the behavior of big business in the United States. In Japan, successful blue-chip firms like Toyota and NEC are well respected across the political spectrum for their contributions to the national economy. There, regulatory barriers exist that align the interests of the corporation with the worker and the nation as a whole. The problem in the United States is that the incentives faced by the parties -- workers, management, investor are not sufficiently aligned.

I would say that a reassertion of government power over big business is a necessary but not sufficient condition for such a regulatory framework be crafted. It is necessary because the government is the only institution capable of effecting change at the national scale. It may not be sufficient because of two mutually reinforcing factors: one, powerful interests are aligned against such changes (as you touched on), and two, today's generation of policy-crafters, even those that are otherwise well-intentioned, are largely clueless.